Although the Government of Canada has yet to change the EI laws and regulations (the Employment Insurance Act and Employment Insurance Regulations), it issued an interim order in August 2020.
Nelligan Law gratefully acknowledges the contribution of Avery Yandt, Student-at-Law, in writing this blog post.
Terminated employees are often entitled to both severance pay from their employer and to Employment Insurance benefits. Traditionally, these two payments cannot overlap, meaning employees had to wait for their severance payments – or, if paid a lump-sum, the number of weeks represented by the lump sum – to end before collecting Employment Insurance. This rule is in place to protect against the employee “double dipping” and obtaining double recovery.
However, for benefit periods between September 27, 2020 through to September 27, 2021, terminated employees receiving a lump-sum severance payment can immediately collect their Employment Insurance benefits. This change, brought in as a part of the COVID-related updates to Employment Insurance, can be an important point to consider for both employers and employees when negotiating severance packages.
Types of Termination Packages
Although termination packages can take many forms, they often fall into one of two payment models: salary continuances or lump sum payments.
An employee receives a salary continuance when the employer continues to pay them severance, on their regular payroll schedule. From the employee’s perspective, they continue to receive their paycheck for a period of time but are no longer employed.
By contrast, an employee receives a lump sum severance payment when the employer pays the severance all at once. After receiving the lump sum, the employee is not entitled to any further payment from their employer.
Employees, with the assistance of a lawyer, can often negotiate the payment model as part of a severance settlement.
Employment Insurance’s Recent Evolution
Over the last two months, Employment Insurance (EI) has evolved in response to the COVID-19 terminations. Back in March 2020, before the pandemic, terminated employees became entitled to EI benefits once they received all payment from their employer, including their paid notice period and severance, where applicable. Service Canada refers to this amount as money paid on separation.
Under the old EI scheme, an employee could not collect EI until this money paid on separation had been paid out. For employees receiving their money through salary continuance, the employee begins claiming EI once they no longer receive their salary. For those receiving a lump sum, Service Canada would calculate the EI start date as if they received the lump sum over time, as a salary, allocated to the equivalent number of weeks represented by the lump sum.
For example, if an employee received 20 weeks’ worth of severance as salary continuance, they would not be able to collect EI until the 20 weeks had elapsed. Similarly, if the 20 weeks had been paid as a lump sum, Service Canada would “allocate” this lump sum to the 20 weeks following termination and then only would the employee be able to collect EI.
Last spring, COVID-19 brought with it the Canada Emergency Response Benefit (CERB). The payment of CERB was not affected by the payment of an employee’s severance package. Instead, an employee was entitled to CERB immediately once terminated.
Last September, EI evolved yet again to transition from the expired CERB benefit. Eligible employees terminated after September 27, 2020, will receive EI, but the new interim rules will apply until September 27, 2021.
Today’s Employment Insurance
Beginning September 27, 2020, the timing of an employees’ EI benefits depends on whether they receive a lump sum payment or salary continuance. Under the salary continuance model, the pre-COVID EI still stands. Where an employer pays a salary continuance, an eligible employee can collect EI after they no longer receive their salary.
However, if an employee receives their money on separation as a lump sum payment, they may now be able to begin collecting EI before the number of weeks represented by that lump sum have elapsed. This interim order has the effect of excluding lump sum payments from the definition of “earnings” under the Regulations, allowing employees to begin receiving their EI benefits despite having also received a simultaneous lump sum separation payment. In effect, employees terminated after September 27, 2020, may be able to simultaneously receive both EI and their severance payments, if the employer agrees to provide that money on separation in one payment.
Given these changes, employees should contact Service Canada immediately upon termination, and no later than 30 days after termination, to learn how the payment structure of their severance package might impact their EI benefits. Be sure to take detailed notes, including the time and date of your call, when speaking with Service Canada.
Both employees and employers should seek legal counsel for guidance on their particular termination situation.